Trusts are commonly used to provide income or financial stability to individuals who may not be able to take care of themselves, for example, children or people with learning disabilities or mental health issues. They can also be an excellent tax planning tool and are often recommended by accountants, lawyers and IFAs.
However, there is more to creating a trust than just the initial paperwork. In this article, we look at the advantages and disadvantages of setting up a trust and also what is involved on an ongoing basis.
Who is involved in the trust?
For a trust to be legally binding it needs to have three elements:
A settlor(s) – the person(s) who is transferring their money or assets into the trust fund for the sole use of the beneficiaries. The settlor is responsible for identifying who the trust is being set up for and who will be responsible for administering the trust based on the instruction they set out in the trust deed.
A beneficiary (ies) – a person(s) who is specifically named to benefit from the trust.
A trustee(s) – a person(s) who is appointed by the settlor to be the legal owner of the assets in the trust. Trustees must manage the assets held in the trust and adhere to the rules laid out in the trust deed.
Each trust will have one or more trustees and one or more beneficiaries.
The advantages of trusts
For most people. the main reasons for setting up a trust fund come down to one or more of the following points:
To provide a future income source or financial stability.
To protect your family’s current and future assets.
To limit any future inheritance tax liabilities.
The disadvantages of trusts
Trusts are not suitable for everyone. It is important to take professional advice so that your circumstances can be thoroughly examined to identify if a trust would be the most appropriate form of asset management or tax planning.
The disadvantages of trusts include:
They can be complicated and difficult to understand.
The costs associated with setting up and administering the trust fund can be quite large depending on the complexity of the situation that the trust is being set up to manage.
Trustees may find their powers are restricted due to the instructions laid out by the settlor in the trust deed.
It is important for the settlor and the trustees to fully understand the implications, requirements and costs of running the trust fund before it is created. At Finch Tax we can explain all of these aspects and give you a detailed proposal to help you decide whether you want to pursue creating a trust or not.
Trust types
There are different types of trusts within the UK, the main ones being:
Bare trusts – are often used when parents or grandparents wish to make a gift to a child. Unless specified otherwise, the assets within the trust will pass to the child (beneficiary) when they turn 18 (or 16 in Scotland).
Discretionary trusts – these are flexible trusts and allow the trustees to decide when and to whom any income or assets should be distributed.
Life interest trusts – allow the ‘life tenant’ of the trust to receive income or enjoy the benefits of the property/asset which is owned by the trust, for as long as they live.
Each type of trust has different rules for how it should be managed, but also how it will be taxed. Finch Tax will take you through the different options and can recommend which type of trust will best achieve your objectives.
Administering the trust
The creation of a trust is just the start of the process. Depending on the type of trust, and what instructions have been laid out in the trust deed, trustees may also be responsible for the following activities:
Preparing annual accounts.
Submitting tax returns and paying any tax that is due.
Registering with the Trust Registration Service if a tax liability has been incurred.
Making trust distributions to beneficiaries.
Completing and submitting all inheritance tax forms, where relevant.
Reviewing the effectiveness of the trust.
Winding up the trust if it is no longer required.
Trusts can be a very efficient way of managing someone’s finances and assets, but they can be complicated, and they do need ongoing management and administration.
We can advise you on all aspects of trusts and tax planning. We can give you an indication of the likely set-up and ongoing administration costs of trusts and help you decide what plan of action is most suitable for your circumstances.
Please contact us for a free and confidential consultation on 0116 216 7681 or email hello@finchtax.com.